Tornado Cash Dropped from Sanctions List
This week marks a major victory for the blockchain sector as the coin mixing protocol Tornado Cash was dropped from the US sanctions list. The decentralized mixer, which has operated under sanctions since Aug 2022, offers permissionless crypto anonymization options. Here’s what you need to know.
What Is Tornado Cash?
Tornado Cash operates as a coin mixer. These protocols obfuscate your transactions by mixing them with others, making it more difficult to trace. They can often employ additional tactics like varying fees and transaction times to make tracing transactions more expensive and time-consuming.
Coin mixers are controversial, as some see them as an essential component to freedom, and others claim they are tools used by shady individuals to commit crimes like money laundering. It’s in this gray area that the Tornado Cash sanctions debacle began.
The History of Tornado Cash and Its Legal Troubles
Tornado Cash co-founders Roman Semenov and Roman Storm probably never imagined that their coin-mixing protocol would one day end up getting them placed on the US sanctions list. However, this is exactly how this story goes.
Tornado Cash was launched in August 2019 as an Ethereum-based coin-mixing protocol. At that time, most coin mixers were Bitcoin-focused, which helped Tornado Cash garner more users. In a bold move, the developers destroyed their admin keys in May 2020.
This decision effectively locked them out of the system, while also setting in motion a series of events that would ultimately lead to one partner in jail and the other on the FBI’s most wanted list.
Source – Tornado Cash
How Does Tornado Cash Work?
Tornado Cash is an ERC-20 compatible mixing protocol. It resides on the Ethereum blockchain and is open-source. This non-custodial, self-executable mixing protocol allows users to deposit their ETH into a mixing contract to provide added privacy.
The contract’s first task is to take your ETH and deposit it into a large account with other users’ ETH. From there, the system will then create a bunch of transactions using varying amounts that will effectively mix the ETH in the main wallet with others. Also, smaller denominations continually mix with new ETH, adding to the system’s effectiveness.
To withdraw the mixed funds, each depositor must provide their cryptographic proof key. The key shows that the person is the original owner of the deposited ETH, allowing them to then withdraw the same amount of the mixed ETH, minus the gas fee.
What Are Zero-Knowledge Proofs in Tornado Cash?
Tornado Cash integrates a zero-knowledge proof technology. Zero knowledge refers to the ability to complete transactions without sharing any direct information about each account. This feature improves privacy for users and has grown more popular over the last five years within the DeFi sector.
Tornado Cash Shielding: How zETH Improves Privacy
Shielding is another Tornado Cash feature designed to help users remain private. This option allows a user to deposit ETH and withdraw an anonymized version called zETH. The system also uses zero-knowledge proofs as part of the conversion process.
TORN
TORN is the main governance token for the Tornado Cash community. It’s an ERC-20 token that lives on the Ethereum mainnet. Notably, users can stake this token to gain voting rights and the ability to put forth proposals and other alterations to the network features. It can also be used to send value internationally in a permissionless manner.
Why Is Tornado Cash So Controversial in Crypto?
Coin mixers remain controversial because they provide privacy and anonymity to the market. This capability is valuable to both law-abiding citizens and criminals. It’s the latter that has placed Tornado Cash in its current position, as nations like North Korea incorrectly believed that these protocols could enable them to potentially evade sanctions.
Why Was Tornado Cash Sanctioned by the U.S.?
In August of 2022, everything began to take a turn for the worse for Tornado Cash and its founders. It’s at this time that the U.S Treasury Department accused Tornado Clash of being complicit in the +$7B money laundering scheme.
The department alleged that Tornado Cash was a valuable criminal tool utilized for 3 years to enable bad actors, hackers, and even sanctioned nations like North Korea to conduct illegal operations.
The Role of Lazarus Group in the Tornado Cash Sanctions
In their initial report, the U.S. Treasury alleged that Tornado Cash developers knowingly helped North Korea’s Lazarus Group launder funds. The North Korean government-backed Lazarus Group began wreaking havoc on computer systems as far back as 2010.
This hacking team has pulled off some of the largest and most daring attacks in recent history. The group has stolen billions of dollars in tokens, alongside many government secrets. As such, it’s considered an extreme threat to many Western governments, making it a prime choice for sanctions.
Hacking
The WannaCry ransomware attack was a massive hacking mission that saw the Lazarus group damage around 300k computers across 150 countries. The group has also been linked to the ByBit exchange hack that saw 400K ETH stolen, making it the largest CEX hack in history and landing the group and Tornado Cash officially on the US sanctions list.
Tornado Cash Trolling: How Celebrities Got Involved
As is often the case, the crypto community stepped in to help ease the decision. An anonymous Tornado Cash user made it nearly impossible to prosecute Tornado Cash users after sending mixed ETH to thousands of celebrities’ public wallet addresses. Some of the celebrities that received the funds include Jimmy Fallon, Logan Paul, Beeple, Randi Zuckerberg, and many other big names.
Why Tornado Cash Sanctions Sparked Industry Backlash
The decision to place a crypto protocol on a sanctions list was a first for multiple reasons. For one, Tornado Cash is simply executable code that operates on a decentralized network. The developers have no way of stopping the system or preventing users from leveraging its capabilities, or even registering who the users are or the origin of their funds. As such, the sanctions marked the first time a protocol and its users were placed on a sanctions list.
Despite the decision being revoked this week, there are still many unanswered questions regarding the future regulations and how to best protect the privacy of the decentralized market. It’s also demonstrated the near impossibility of preventing users from accessing decentralized protocols.
Should Developers Be Liable for User Crimes?
The idea of holding software developers criminally liable for the bad acts of third parties makes no sense. Many argue that this type of policing will stifle innovation and kill off the entire industry. As the investigation continued, even more questions began to come to light.
The industry wanted to know the key aspects of the allegations. For example, if anyone who used the mixer would be placed on the sanctions list or considered to be in violation of the laws. Also, would other mixers fall under the same category, or was Tornado Cash a rare exception due to users, over whom it has no control?
Why Were Tornado Cash Sanctions Recently Dropped?
Regulators recently dropped the sanctions following the revelation that hundreds of celebrities and other well-known business personnel had been sent ETH directly from Tornado Cash mixed wallets. Interestingly, the sanctions were dropped, but no official ruling was made outlining that coin mixers wouldn’t be targeted again.
When pressed to make the official legal statement, the regulators called the actions a “moot point” as the trial was now concluded. This deflection was seen by many as an acceptable solution. Specifically, Coinbase’s Chief Legal Officer (CLO) has come out publicly to state that a final ruling is necessary to prevent further legal actions against mixing protocols and their users.
Tornado Cash Founders Still Face Legal Battles
Tornado Cash may have been dropped from the sanctions list, but the legal woes for its owners are just beginning. Specifically, the co-founders were charged with conspiracy to commit money laundering, operating an unlicensed money transmitting business, and violating the International Emergency Economic Powers Act.
Additionally, the two were sanctioned by the U.S. Treasury’s Office of Foreign Assets Control (OFAC). In the official report, the OFAC claims that the pair knowingly provided material support to North Korean hackers. However, there always seemed to be a lot of unanswered questions.
Co-founder Roman Storm has a scheduled trial date for next month. He was detained in 2022 and has been in custody awaiting trial since. His partner, Roman Semenov, managed to elude authorities and remains a fugitive at large.
Semenov was recently placed on the FBI’s most wanted list, and a cash reward is now available for any details about his whereabouts. However, given his contribution to the privacy movement, it may be a while before anyone takes up that offer.
Is Tornado Cash Still Safe and Private to Use?
When you examine the details and the open-source nature of Tornado Cash, it’s easy to see that, from a technical standpoint, the project is still functioning correctly. Users can convert their ETH into an anonymized version to protect their privacy, just like it was intended to do from day one.
When discussing discretion, Tornado Cash no longer has the benefit. There will now be an endless supply of blockchain forensic firms seeking to keep tabs on who interacts with the platform and when. This added scrutiny could make Tornado Cash less effective at hiding your identity in the future.
It’s vital to note that most crypto mixing protocols will see some form of added attention in the coming months as blockchain forensics firms continue to experiment with AI-based monitoring systems. These systems will help investigators to keep tabs on who and when users interact with mixers, as part of a new anti-theft strategy.
What’s the Future of Crypto Mixers After Tornado Cash?
The Tornado Cash saga left many people wondering if coin mixers would be regulated out of existence. When you step back and look at the entire market, it’s easy to see that there’s significant demand for this feature. Additionally, the legitimate use cases for coin mixers far outweigh the illegal activities.
For example, Ethereum co-founder Vitalik Buterin explained in a recent interview that he utilized the protocol to anonymize donations to Ukraine. He decided to utilize the mixing software to protect the recipients from becoming targets in the war-torn region.
A recent Law360 report predicts the crypto market will remain under the oversight of US financial regulators, the Securities & Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) for the foreseeable future.
Additionally, the SEC has decided to provide a little more breathing room to companies in the blockchain sector, dropping several high-profile cases recently. These actions open the door for more mixing protocols in the future.
Tornado Cash After Sanctions: What Comes Next?
Privacy is an essential component of freedom, and crypto users must protect their identities as part of keeping the decentralized sector open and accessible to all. Now, as the entire crypto community awaits the outcome of the Storm trial and other key rulings on Tornado Cash, there’s an even stronger need for users to step up and protect their freedom.
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